Yield on high-rated NBFC to harden further by December, tracking g-sec

The yield on corporate bonds of higher-rated non-banking finance companies (NBFCs) is seen hardening further by December, tracking the rise in the yield on government securities, market participants said.

On the other hand, the yield on non-AAA-rated bonds might trade at the current levels as they are already elevated.

Market participants expect the yield on the benchmark 10-year government bond to move up by 10-15 basis points (bps) by December. The 10-year benchmark yield settled at 7.33 per cent on Tuesday.

The yield on the benchmark 10-year government bond rose by 12 bps after October 6, when the Reserve Bank of India announced considering open market operation sales to manage liquidity in the banking system.

Consequently, the yield on NBFCs’ bonds rose by 13 bps across tenures in the same period. The AAA-rated bond yields settled at 7.83-7.92 per cent on Monday, whereas the yields on AA-rated bonds settled at 8.63-8.66 per cent.

“In the case of AAA-rated bonds, where the yields move along with the rally or sell-off in G-secs, the yield will most likely move up because they have relatively faster transmission,” said Ajay Manglunia, managing director and head, institutional fixed income, at JM Financial.

“But in the case of non-AAA-rated NBFCs, there are fair chances it may not rise much because they are already at elevated levels,” Manglunia said.

Typically, fundraising through bonds increases in the corporate bond market in the second half of a financial year due to a fall in the supply of G-secs. Due to a decline in the overall supply, the yield on G-secs falls in the October-March period, eventually leading to a drop in the yield on corporate bonds.

“The benchmark yield is expected to harden further; it might be capped at around 7.45 per cent,” said Vikas Goel, managing director and chief executive officer at PNB Gilts Ltd..

“Apart from uncertainty around open-market operation, the things are fine in the market including the liquidity and the inflation number,” he said.

In the previous financial year, companies and financial institutions raised Rs 8.7 trillion through corporate bonds, of which Rs 5.16 trillion worth of bonds were issued during the October-March period, according to the data on National Securities Depository Limited.